Preparing to invest in startups

Tuesday

Sep 24, 2013 at 12:01 AM

Elizabeth Crowell, owner of the Sterling Place retail chain and e-commerce website, has had several profitable years in business. Crowell decided to invest in other women-led companies and is a graduate of the Pipeline Fellowship angel investing boot camp for women.

Jennie Wong

Elizabeth Crowell, owner of the Sterling Place retail chain and e-commerce website, has had several profitable years in business. Crowell decided to invest in other women-led companies and is a graduate of the Pipeline Fellowship angel investing boot camp for women.

Question: After building and running a successful business for the past decade, you've decided to make the leap from investing in your own company to investing in other entrepreneurs. How did you make this transition, and what advice do you have for others interested in doing the same thing?

Answer: Every investor will have his own path, but I think there are a few key steps everyone should take to increase his odds of success.

Step 1: Get real about your role. Before becoming an investor, any entrepreneur should ask herself: Am I prepared to be on the sidelines of a business rather than playing the leading role? Can I be a coach rather than the star player?

If you can afford to invest in other businesses, your business most likely was profitable and you're comfortable calling the shots and being the boss. And if your business had investors, you probably understand that although their cash, contacts and connections were vital, at the end of the day, your team - with you as the founder or CEO - executed the vision and built the business.

Step 2: Get educated. Investing in startups, especially those run by first-time entrepreneurs, is extremely risky. Since 3 out of 4 startups fail, there is a 75 percent chance you'll lose 100 percent of your money in any given investment.

Step 3: Get going. Once you've made the decision to become an investor and educated yourself, it's time to decide on your personal parameters.

» Geographic constraints: local, national, international?

» Stage of company: Are you interested in seeding a pre-revenue startup, or are you only interested in companies looking for capital to expand a successful idea?

» Size of investment: How much will you invest per company? Fabled angel investor Joanne Wilson follows one simple rule: Whenever she invests, she buys 1 percent of the company. As the company continues to bring in additional rounds of capital, she reinvests so that she maintains the 1 percent ownership.

» Go it alone or join a group: Angel groups and venture funds can help you diversify and spread the risk, as can funds associated with business accelerators such as Women Innovate Mobile. But if you're not ready to commit to an annual investment minimum, there are online groups such as AngelList and CircleUp that provide deal flow without any dollar commitment.

Finally, dig deep and get clear about what matters to you. This is your chance to put your money where your mouth is.

Contact Jennie Wong, an executive coach and author of the ebook "Ask the Mompreneur," at TheJennieWong@gmail.com.